Yen is the Devaluation Juggernaut

Wouldn't you like to fly in my ADXY balloon? Oh we can fly.......

China's dirty USD peg is causing a market-enforced Plaza Accord. Back in 1985, the G5 agreed to weaken the U.S. dollar. The main effect was the appreciation in the yen that led to twin bubbles in stocks and real estate in Japan. China learned from this. Chinese economists and officials have repeatedly said they won't repeat Japan's mistake. See: Potential Dollar Target Rises as China Refuses New Plaza Accord.

What's happening today is a kind of stealh Plaza Accord. The Chinese yuan is appreciating versus the yen, won and euro.

China does not want yuan appreciation. It is an export economy with strict capital controls. It has locked down its capital account to keep reserves from depleting. As the yuan rises, reserves will come under ever more pressure because the trade balance will start turning unfavorable. Leaving aside the housing bubble, they don't want deflationary pressure ripping through an economy with a debt-to-GDP ratio of more than 300 percent.

At some point, China will cry uncle and let the yuan drop. Or it won't. There's a slim possibility that WW3 is underway and China makes a move. However, this move would be akin to what South Korea did in 1997. Whatever choice they make, a global disaster is coming. All of this is mute if the U.S. dollar peaks now and reverses lower. If the U.S. dollar keeps rising and if, importantly, export competitors of China are some of the worst performing currencies, then a crisis is inevitable.

As for the equity markets. You can't always get what you want, but I wouldn't mind a bounce. The 4120 level on ES would be the final gift for bears in 2022 because it will be the last shortable peak followed by a final low for this leg sometime in the autumn.

Crude oil is cratering. It is go time on oil shorts. If this puts a floor under ZB, then we have the setup for a temporary bounce in stocks.

Morning Reading: The Dawn of Quantitative Easing, and the Boom and Bust at Rue Quincampoix

Since the bank’s notes represented a legal claim on gold livres held securely in the bank, those who accepted the notes in public transactions no longer had to worry whether coins they accepted as payment were counterfeit — which was always a risk with coin transactions. As a result of this key advantage, which had been at the foundation of the Bank of Amsterdam’s success over the prior century, the notes quickly became a preferred method of payment.

Those who do not learn from history are doomed to repeat it. There are good arguments against fiat currencies and credit monies, but what's often overlooked it why it became popular. Although there is often a nefarious actor who gives it the nudge into wide circulation, the truth is fiat has almost always met a popular demand. In most cases, sound money is anti-democratic.